Making book on the supercommittee

The author examines different economic and fiscal outcomes from the supercommittee's decision. | AP Photo

This simple change could produce more than $200 billion in deficit reduction.

Assuming the committee could also find a way to include an extension of the payroll tax holiday for next year, the panel will have done its job. Financial markets would respond positively because their worst fears hadn’t been realized.

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But the response would be far from joyous because significant work would remain to put the nation on a path to long-term fiscal sustainability — a stable debt-to-GDP ratio. The economy wouldn’t get much of a boost from all this, but it would ensure the recovery continues.

Agreeing to some substantive deficit reduction would also mean that the automatic spending cuts in 2013 will be smaller, more economically and politically palatable and thus more likely to occur. More important, it indicates there is political will to make tough decisions and increases the odds that policymakers will figure out a way to achieve fiscal sustainability.

Done deal — 15 percent probability: It is a stretch to think that the supercommittee will achieve its goal, but it’s not unthinkable. It would require that Democrats on the committee relent on meaningful cuts to entitlements, and Republican members agree to tax revenue increases. Big changes wouldn’t be necessary, so this path can’t be ruled out. But both parties would be diluting key election themes, making it less likely.

Financial markets would rally in this scenario, and the economy would be better for it — but probably not by much. There would still be significant political acrimony and far more for policymakers to do to establish fiscal sustainability. S&P probably would remain steadfast on its downgrade. The economic and political payoff from a done deal thus wouldn’t be much greater than from a partial one.

Big deal — 5 percent probability: A big deal would be close to $3 trillion in 10-year deficit reduction — what’s really needed for fiscal sustainability given the nearly $1 trillion already agreed to. Because of the lack of time and the complexities involved, the committee won’t be able to specify precisely how to get an agreement this big done. But it would give instructions to relevant congressional committees to come up with the necessary cuts and tax revenue increases. Given that this would require significant changes to entitlements and increased tax revenues, the odds of this are low.

It’s too bad, because the economic payoff would be huge. Financial markets would rally substantially, and confidence and economic growth would surge. There might be appropriate wariness that this is too good to be true — but if it were true, our financial futures would quickly get brighter.

It is easy to be pessimistic. These are extraordinarily difficult times, and the collective psyche is teetering. But we are closer to righting the wrongs that got us into this economic mess than most of us believe. With just a bit of reasonably good policymaking by the supercommittee, progress may soon shine through.